Trump in power - impact on UK and other economies
Discussion
DonkeyApple said:
Trouble is the last decade has seen widows and orphans buying toxic debt on 4% yields and using leverage to increase the return. A bit more of a drop and a few margin calls and defaults and we're back to 2007. I don't really see Trump being the cause but his words have highlighted the massive problem that waits for us all down the line.
Everyone has their own opinion on what the yield should be on sovereign, the problem is it is often the rate they would like! So a UK house owner with a renewal approaching has a different need to that of a pension fund guy.
What almost everyone wants is stability, but they want that stability at their rate
(and that can never happen)So a yield of 1.7 which many may like appears wrong (very wrong) when one considers inflation or future inflation.
Countries are at different stages of growth and the associated inflation. Without the Trump comments the US was further along in the growth curve.
So for me this is a saliva blip that will correct a little but does indicate future direction. It will happen.
In an effort to explain the bond market to my wife because we reduced our holdings. I said imagine you have ten brothers and sisters. We lend 100K to the two smart responsible ones at 3% We lend 20K to the 3 in business at 5, the next 3 we will give 5K at 7 and the other 2 we offer them 18% on modest amounts.
All good we will make money...until one of the top 5 does something unexpected.
The smaller ones we can absorb, like Russia Argentina Greece but when Japan or the US coughs we pay attention. We might need to adjust up our rates to every brother and sister so the system equates.
Her reply was "so we would still lend to Bob"
Which I found funny, but it means she got it, she understood risk.
The Bond market makes sense if you approach it as a lender. However most see it from the point of "I've got a mortgage and I'm worried"
If you consider the sovereign side as unsecured and domestic as secured then the rates can be lower, but to lend to Joe Smith at 1% so he can buy a house IMO was approaching stupid, Joe still pays his 2K mort but it is all P and very little I. Basically all it has done is given him the ability to borrow more and increase the house price. If the rate had been 4% fixed full term he would still pay 2K a month for the same house because the house price would not have been inflated by the earnings multiple that included an unrealistic P & I ratio.
As a bond buyer, would you take on Joe's loan?.
Ok he needs to renew at the new rate.....but he may start to default because his cash flow cannot absorb the new I component of his loan.
Ok I done my bit to confuse everyone and gone way off topic
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